When a bank becomes too cooperative

When a bank becomes too cooperative

The rift between the Congress Party and Nationalist Congress Party seems to have found a new battleground Maharashtra State Cooperative (MSC) Bank.

On May 7, when the Reserve Bank of India (RBI) recommended the 44-member board be superseded by state government administrators, NCP President and agriculture minister Sharad Pawar was quick to express his displeasure, "The bank has disbursed loans on the state government's guarantee. There has not been a recovery of such loans and that is why it's being shown as NPAs."

He had good reason to be unhappy. For one thing, the apex co-operative bank's board has NCP heavyweights Manikrao Patil as chairman, Maharashtra Deputy Chief Minister Ajit Pawar as director and Congress's Balasaheb Karnik as vice-chairman.

When a bank becomes too cooperative

For another, the largest concentration of non-performing assets (NPAs) of the cooperative bank was in the sugar sector, at 57.3 per cent. Next to sugar, the other concentration of NPAs was to spinning mills at 17.44 per cent.

The share of the sugar sector stood at 39 per cent as on March 31, 2009. This increased to 48.9 per cent by March 31, 2010.

To put the numbers in perspective, banks are allowed exposure of up to 25 per cent to a sector, but cooperatives do not have any such limits.

At a time when sugar mills are sitting on inventories because of excess production and exports are not being allowed, drying up of credit would mean very bad news.

No wonder, nephew Ajit Pawar floated a conspiracy theory when he told reporters in Satara, "The decision seems to have been taken at the political level in Delhi...Even a notice was not issued to the MSCB," he said.

When a bank becomes too cooperative

The angst of both Sharad and Ajit Pawar is obvious, because the Pawar family has had a close association with the bank for over two decades.

Sharad Pawar, though not in any executive position, played an active role for a decade - between 1988 and 1998 - when the bank released substantial amounts to the cooperative sector, especially to sugar and cotton spinning mills.

In 1998, Ajit Pawar became the chairman of the bank, which further reinforced the family's relationship with the bank. He is presently on its board as a director.

But RBI has put up a strong case. On May 7, the appointment of two senior IAS officers - state Agriculture and Marketing Secretary S K Goyal and Planning Secretary Sudhir Shrivastav- as administrators was done after the bank was accused of overstatement of profits in 2009-10 and non-compliance with nine out of 11 RBI directives.

When a bank becomes too cooperative

The accusations were based on an inspection report by the National Bank for Agriculture and Rural Development (Nabard) and another report by the bank's statutory auditors, Joshi and Nair.

The rot runs deeper. According to Nabard's inspection report, the bank resorted to 'ever-greening of loans' it adjusted non-payment of loan installments and interest by issuing fresh loans.

Drawals were allowed to defaulting units without submission of an unconditional irrevocable default guarantee upfront from the state government.

Insiders say the political pressure was such that at times the bank gave in and continued to provide finance to units having weak financial indicators like negative net worth, current and accumulated losses.

In addition, the bank did not comply with credit monitoring arrangement (CMA) guidelines and sanctioned loans by violating individual unit exposure norms.

When a bank becomes too cooperative

A case in point was Maharashtra State Electricity Distribution Company and Maharashtra State Power Generation Company in March 2010, where necessary credit authorisation for sanction and disbursement were not taken.

In their defence, bank insiders say this was happening under the nose of the RBI and Nabard, as they had representatives on the board of directors.

N Srinivasan, a former Nabard official and now a consultant in the cooperative banking sector, is scathing: "MSC Bank is an extreme case of borrowers controlling the bank and its decision making. The bank has given large loans (especially to the sugar sector) that are high risk and compounded by weak monitoring and lax observance of credit discipline. The issues in solvency that have surfaced might be technical and remediable, but the point is that such a large bank should never have come to this situation."

When a bank becomes too cooperative

But the bank is putting up a brave face. Within two weeks of RBI's recommendation, the bank came out with its 2010-11 reports, claiming operating profits of Rs 15.8 crore (Rs 158 million) and a positive net worth of Rs 238 crore (Rs 2.38 billion) quite a turnaround from the Rs 1,043 crore (Rs 10.43 billion) loss and negative net worth of Rs 144 crore (Rs 1.44 billion) in 2009-10 that the auditors had reported after inspecting its balance sheet.

In fact, the bank had reported profits of Rs 2.87 crore (Rs 28.7 million) before the auditors' inspection turned the tables.

The latest balance sheet, which has been submitted to the administrators, is now going through the inspection of auditors Batliboi & Co, who have to give the report by June-end. And Nabard, on its part, has also decided to inspect the balance sheet. If the report is positive, the bank will be eligible for refinance from Nabard.

When a bank becomes too cooperative

Manikrao Patil, who has been chairman of the bank for the last five years, puts the blame squarely on the state government. He said if the state government had released Rs 1,700 crore (Rs 17 billion) towards guarantees, the bank's financial position would not have deteriorated.

"Due to the pro-active role and some harsh decisions by the board of directors, the bank's net worth has turned positive at Rs 238.14 crore (Rs 23.8 billion) in 2010-11.

The capital funds risk weighted assets ratio also became positive at 3.84 per cent from minus 1.5 per cent," he argues, adding that unlike earlier reports, MSC Bank has not complied with only two of the 11 RBI directives since 1996.

When a bank becomes too cooperative

A senior manager, while admitting the bank's defaults, says MSC Bank is an apex bank and therefore, needs to be saved.

"The Maharashtra government can consider providing recapitalisation to the bank on the lines of what has been done to a few commercial banks by the Centre," he said, citing the examples of ailing Indian Bank and Uco Bank, which were revived through the Centre's help.

However, when political battles are being fought through a bank, the machinations might be completely different.